The Fed added $11 billion to its SOMA account for the week ending yesterday. It purchased $11 billion in mortgage securities directly from banks. This injects $11 billion into the banking system. Cash is “high powered” money, meaning it can be leveraged 10x (banks need to hold 10% in reserves against “high powered” money. $11 billion is $110 billion of leverage for the banks to use for activities such as propping up the stock market.
This certainly explains why there appears to be another “V” recovery in the stock market after a near-10% drawdown in the Dow and the SPX. This is very similar to the 10% market plunges in August 2015 and January 2016, both of which were followed with highly unusual “V” recoveries.
This is also likely the catalyst that powered gold’s $41 rise since February 9th.
Clearly the Federal Reserve – not withstanding the fecal odor that emanates from Fed officials’ mouths when they speak – has an implicit monetary policy that targets the stock prices.
Furthermore, the Fed must be getting worried about the housing market. Removing $11 billion in mortgage securities from the banking system and replacing those securities with cash was likely a move targeting the rate spread between conventional mortgages and the 10-yr Treasury. Mortgage purchase applications plunged 6% last week. This was without question in response to mortgage rates pushed meaningfully higher by the rising 10yr Treasury yield and the widening of spreads associated with higher volatility in the markets.
I remain highly skeptical that the Fed will actually follow-through with its stated plan to raise monthly its balance sheet reduction to $30 billion this year. In fact, the Fed has yet to disclose a definitive schedule for said balance sheet reduction. I’m taking wagers that we do not see this occur.
